RUAN JIALIN v. SHANG YU ZHONG AND ANOTHER

HCCW 65/2018

[2021] HKCFI 788

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 65 OF 2018

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R E A S O N S  F O R  J U D G M E N T

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1.  By petition presented on 12 March 2018 (“Petition”) the petitioner, Mr Ruan Jialin (阮家林) (“P”), seeks an order under ss 724-725 of the Companies Ordinance (Cap 622) (“CO”) requiring the 1^st respondent, Mr Shang Yu Zhong (尚玉忠) (“R1”), to buy out his shares in the 2^nd respondent, Hong Kong Auson Mining Group Limited (香港澳森礦業集團有限公司) (“Company”), alternatively, a winding-up order against the Company under s 177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“CWUO”).

2.  At the end of the trial, I dismissed the Petition and ordered P to pay the costs of and occasioned by the Petition to R1, the Company and the Official Receiver.  These are the reasons for my judgment. 

A.      BACKGROUND FACTS

3.  The following facts are not in dispute or are indisputable.

4.  In 2011, P was an employee of a State-owned company established in the Mainland.  R1 was a merchant engaging in wine selling business in Australia.  P’s elder brother, Mr Ruan Jiaqi (阮家琪) (“Brother”), was the Chief Executive Officer of 南京泓潤能源發展有限公司 (“Nanjing Co”) which had licences to carry on import and export business in the Mainland[1].

5.  In July 2011, Brother introduced R1 to P[2].  Prior to this, P did not know of, and had no dealing with, R1[3].

6.  At that time, R1 said to P that he knew of an opportunity to cooperate with one Mr Hzndarmin Siantar (佘錦亨) (“Shea”), who owned some nickel and coal mines at P.T. Bumi Buton Delta Megah in Indonesia (“Mines”) but had no money to develop the same.  R1 said he had experience in running business but did not have enough money to finance the mining operation or the requisite licences to import any nickel and coal mines into the Mainland.  Given that P had the financial means to invest in the business, while Nanjing Co had the requisite import/export licences, R1 proposed to form a business partnership with P for the purpose of carrying on mining development and trading business in Hong Kong and Indonesia.  P agreed to the proposal[4].

7.  As recorded in a “shareholder resolution” (股東會決議) (“Shareholders Agreement”), a meeting was held on 28 August 2011 at which P and R1 agreed to cooperate in carrying on mining business in Hong Kong and Indonesia in the following manner:

“經友好協商，現就股東雙方在香港、印尼成立合資公司，合作從事印尼鎳礦、煤礦開發和貿易經營，以及合資公司的運行管理等事宜達成如下決議。

1. 股東構成:

姓名:尚玉忠；性別：男；出生年月：[redacted]；國籍：澳洲；護照號：[redacted]

姓名：阮家林；性別：男；出生年月：[redacted]；國籍：中國；護照號：[redacted]

2. 股東雙方尚玉忠、阮家林一致同意以其個人名義按各50% 的股份比例在香港、印尼組建合資公司，並按香港及印尼當地法律進行工商註冊登記。且按50%的股份比例享受股東權益，履行股東義務，風險共擔，利益共享。

3. 尚玉忠出任合資公司的董事長，全面負責公司的各項經營管理工作；阮家林出任合資公司總經理，分管公司財務，並協助董事長做好公司各項經營管理工作。

4. 雙方一致同意無論決定操作什麼項目，形成決議之前雙方一定要共同進行項目的考察和調研，並形成項目可行性報告，編制項目投資及利潤預算，在雙方意見一致並簽字確認的情況下方可操作。

5. 對於經雙方考察論證確定要操作的項目，雙方按開發的品種在印尼FOB狀態編制該專案的財務預算。明確該項目總的投資額度，雙方按各50%比例在規定的時間內出資到位確保項目的正常運轉。如果一方未能按約定出資到位，則另一方有義務盡力協調將不足資金補到位，在該項目利潤分配決算時，雙方可按針對該項目的實際出資金額協商確定利潤分成比例。

6. 雙方共同研究確定需要列支的經營管理費用科目明細，針對每一項經營管理費用的包銷審核均須制定相對應的管理制度進行管理和控制。明確費用發生的額度權限，報銷審核及驗收證明流程，雙方一致同意非用於雙方共同投資項目的費用一律不得在公司列支。如人員工資，招待費用，差旅費，通訊費，辦公費等。

7. 公司帳戶對外支付資金時須雙方共同簽字確認，辦理銀行支票轉款，轉帳時須雙方共同簽字後才能生效，方可進行銀行支票轉款業務操作。網上銀行業務操作雙方各掌管一個密碼，轉款、轉帳時雙方各自輸入密碼確認進行轉款、轉帳，任何一方不得擅自從銀行提款或轉款；在特殊情況下雙方克協商相互委託授權另一方進行資金支付的操作。

8. 雙方一致同意所有項目所產生的利潤主要留在香港公司，國內需要留利潤時須雙確認留存比例，雙方簽子確認單列帳戶掌管。印尼公司帳戶只用於公司在印尼業務開展時支付貨款和項目款資金的劃轉業務操作。”

8.  Pursuant to the Shareholders Agreement:

(1)  On 8 September 2011, the Company was incorporated under the former Companies Ordinance (Cap 32) with P and R1 being the only subscribers holding 50 shares each.

(2)  R1 was appointed as Chairman and sole director of the Company, which positions he continues to hold to date.

(3)  P was appointed as general manager responsible for managing the financial affairs of the Company and assisting R1 in managing the affairs of the Company.

9.  Since 2012, the shareholdings held by P and R1 in the Company have been changed to 42% and 58% respectively[5].  No complaint has been made by P about the change in his shareholding in the Petition. 

10.  In May 2012, P and R1 decided to cooperate with Nanjing Co and Shea in developing and exploring the Mines and they injected funds into Nanjing Co for this purpose[6].

11.  At around the same time, P and R1 also set up 2 other companies namely, Hong Kong Auson Group Limited (香港澳森集團有限公司) incorporated in Hong Kong (“HK Auson”) and PT Auson Mining Indonesia (印尼澳森集團礦業有限公司) incorporated in Indonesia (“Indonesia Auson”) as their vehicles to carry on mining business. 

12.  However, the quality of the nickel extracted from the Mines and sold through Nanjing Co was not satisfactory and could only be sold at a low price.  As a result, the parties suffered a loss of RMB8 million in the business[7]. P and R1 were frustrated by the result and agreed to put an end to all the mining business[8].

13.  By letter dated 4 January 2013, the Companies Registry informed R1 that HK Auson had been deregistered pursuant to s 291AA(9) of the CO.

14.  On 22 February 2013, R1 (as party A) and P (as party B) came to an agreement (協議書) to terminate the Company, HK Auson and Indonesia Auson on the following terms (“Deregistration Agreement”):

“現甲乙雙方就終止香港澳森礦業集團有限公司(以下簡稱 ‘澳森公司’)及香港澳森集團有限公司和印尼澳森礦業有限公司相關事宜達成以下協議：

第一條 甲乙雙方共同確認的基本事實。

1、甲乙雙方共同確認於2011年7月14日至7月28日期間雙方共支付給印尼鎳礦主佘先生100萬美元。其中25萬美元由甲方從香港支付，75萬美元由乙方委託江蘇天翼能源有限公司通過江蘇匯鴻國際集團土產進出口股份有限公司的香港公司轉付甲方支付給印尼鎳礦主佘先生代表。具體明細如下 (附匯款憑證):

A、在2011年7月18日及2011年7月28日乙方根據甲方要求委託江蘇天翼能源有限公司匯入江蘇匯鴻國際集團土產進出口股份有限公司兩次共計人民幣4860481元，折合美元75萬，再由江蘇匯鴻國際集團土產進出口股份有限公司的香港公司轉付甲方75萬美元，再由甲方支付給印尼鎳礦主佘先生代表；

B、2011年7月15日甲方於香港支付給印尼鎳礦主佘先生代表25萬美元；

2、乙方委託詹軍育女士及江蘇天翼能源有限公司累計匯給甲方人民幣153萬元，具體明細如下 (附匯款憑證):

A、2011年7月14日乙方委託詹軍育女士匯給甲方人民幣323萬元；

B、2011年7月18日甲方匯人民幣300萬元至江蘇天翼能源有限公司帳戶；

C、2011年7月28日乙方委託江蘇天翼能源有限公司匯給甲方人民幣130萬元；

3、2011年7月15日甲方委託蔡敬美女士匯入江蘇天翼能源有限公司帳戶人民幣160萬元整，但乙方至今未收到匯款人蔡敬美女士關於自願代甲方支付該筆款項的聲明，故該筆款項不能視為匯款人蔡敬美女士代甲方的還款。現甲方同意該筆款項不計入雙方資金往來的統計中，同意由乙方按原路徑退還匯款人蔡敬美女士。如蔡敬美女士本人出具自願代甲方付該筆款項的有效聲明或協議，則該筆160萬元款項記入甲方投入雙方的往來款項中，如自本協議簽訂之日起6個月之內蔡敬美女士本人未能出具自願代甲方付該筆款項的有效聲明或協議，則由乙方按原路徑退還給匯款人蔡敬美女士，但乙方在退還給匯款人蔡敬美女士之前要通知甲方。

4、乙方確認，自2011年4月1日起至2012年5月18日止，甲方累計投入用於印尼佘先生鎳礦聯合開採項目的總費用 (其中包括預付礦主25萬美元、開礦的工程承包費、人員工資、差旅費等所有費用) 扣除甲方已報銷領取的37.1萬美元和應還乙方人民幣153萬元後，折合人民幣為62萬元。具體明細如下：

A、自2011年4月1日起至2011年7月30日期間甲方累計投入印尼佘先生鎳礦聯合開採項目的總費用為人民幣580484元 (見附件)；

B、自2011年7月30日至2012年5月28日期間累計投入印尼佘先生鎳礦聯合開採項目的總費用為人民幣2364500元 (包括支付開礦承包商的工程費、機械設備購置費、運費、人員工資、差旅費、招待費等所有費用，其中人員工資包括甲乙雙方一致同意由乙方補發自2012年2月至2012年5月尚玉忠、張廣東、馬騰、孫歌、李傳華、會計共六人的工資合計人民幣拾萬元，其中張廣東、馬騰兩人工資人民幣48000元由乙方直接發放，另外尚玉忠、孫歌、李傳華、會計共四人工資合計人民幣52000元由甲方代領發放)。(見乙方確認的附件)：

C、甲方在2011年月日至2012年月日期間共報銷並領取美金37.1萬元折合人民幣2411500元 (見附件)；

5、乙方除預付礦主佘先生75萬美元以外，投入印尼佘先生鎳礦聯合開採項目的費用不再統計確認。

6、甲方於2011年6月介紹南京泓潤能源發展有限公司與印尼鎳礦主採購鎳礦船，甲方代墊傭金及應得傭金總計剩餘約150萬元人民幣。

7、甲乙雙方一致確認，乙方從未參與香港澳森集團有限公司的經營，香港澳森集團有限公司如有對外發生的任何業務及債權債務均與乙方無關，如果出現一切責任均由甲方承擔。

8、甲乙雙方一致確認，截止本協議簽訂時止，香港澳森礦業集團有限公司除以其名義與南京泓潤能源發展有限公司發生過一筆業務外，其餘沒有對外發生過業務或存在債權債務關係。因公司印章、營業執照等均由甲方保管，如有其它債權債務關係均由甲方承擔，與乙方無關。另外印尼澳森礦業有限公司也沒有對外發生過業務，不存在任何債權債務關係。截止本協定簽訂時止，甲乙雙方成立的上述三家公司不存在任何債權債務關係。

第二條 關於乙方向甲方的支付

1、基於以上第一條確認的事實，乙方同意支付給甲方按實際投入印尼佘先生鎳礦項目的總費用及代墊傭金和應得傭金的金額扣除應歸還給乙方人民幣153萬元折合人民幣總計212萬元(需扣除張廣東、馬騰兩人工資人民幣48000元)。

2、乙方向甲方支付的期限及條件分別為:

(1) 乙方於2013年2月22日前向甲方支付人民幣180萬元或在香港支付美金25萬元。

(2) 上述款項支付後，甲乙雙方共同赴香港辦理香港澳森集團有限公司和香港澳森礦業集團有限公司的註銷手續。

(3) 在香港澳森集團有限公司、香港澳森礦業集團有限公司的註銷手續辦理完畢後，乙方再向甲方支付餘款32萬元。

第三條 關於香港澳森集團有限公司、香港澳森礦業集團有限公司及印尼澳森礦業有限公司的註銷。

1、甲、乙雙方一致確認，香港澳森集團有限公司的所有債權債務與乙方無關，由雙方共同辦理註銷手續。

2、甲乙雙方一致同意，註銷香港澳森礦業集團有限公司。註銷公司的手續由甲乙雙方共同辦理，註銷公司所需要的費用首先以公司帳戶所餘資金支付，不足部分由甲乙雙方各自承擔50%。

3、除上述在香港註冊的公司外，雙方還在印尼註冊設立了印尼澳森礦業有限公司，雙方同意該公司也予以註銷，註銷費用由雙方承擔。

第四條   其他

1、乙方向甲方支付全部人民幣212萬元後，甲方確認原甲乙雙方共同預付給印尼鎳礦主佘先生的100萬美元剩餘尚未扣返的款項，以及原先購置現存於印尼佘先生鎳礦聯合開採項目的所有機械設備及其它設施的所有權全部歸乙方所有。

2、在雙方履行上述全部權利義務後，甲方與乙方、甲方與江蘇天翼能源有限公司、甲方與南京泓潤能源發展有限公司 (包括該公司總經理阮家琪) 等均再無任何債權債務及法律關係。

…” (underline added)

15.  As is clear from clause 2.2(1)-(3) of the Deregistration Agreement, it was agreed between the parties that after P paid RMB1,800,000 to R1 by 22 February 2013, the 2 of them would go to Hong Kong to deal with matters relating to the deregistration of the Company and HK Auson.  After completion of the deregistration of the Company and HK Auson, P would pay the remaining balance of RMB320,000 to R1. 

16.  By a handwritten receipt dated 22 February 2013, R1 confirmed that he had received RMB1,700,000 remitted from Brother on behalf of P.   

17.  On 25 February 2013, H&C Business (HK) Limited (“H&C”), a corporate service provider, prepared the following draft documents for the purpose of applying for deregistration of the Company:

(1)  Form DR1 – Application for Deregistration of a Defunct Private Company (“Form DR1”);

(2)  Minutes of meeting of director of the Company dated 25 February 2013 recording the resolution passed to close the bank accounts of the Company (“Minutes”);

(3)  Notice to Industrial and Commercial Bank of China (Asia) Company Limited requesting the bank to close the 3 specified accounts of the Company and to withdraw all the monies deposited therein (“Notice”); and

(4)  Request under s 88B of the Inland Revenue Ordinance (Cap 112) for a Notice of No Objection to a Company being Deregistered (“IRD Request”).

18.  The Form DR1, the Minutes and the Notice were signed by both P and R1, while the IRD Request was signed by R1 alone.  The professional fee charged by H&C was paid by R1 and acknowledged by P.   

19.  Also on 25 February 2013, P and R1 signed a handwritten proof (证明) in these terms (“Proof”):

“2013年2月25日在香港恆誠商務有限公司辦理香港奧森礦業集團有限公司註銷手續。雙方已簽字，手續已辦齊。乙方需在2013年2月26日前把餘款付清。(甲方須交回欠條後方可付餘款) ” (underline added)

20.  P did not pay the remaining balance to R1 by the deadline stated in the Proof (i.e. 26 February 2013).   

21.  The deregistration of the Company did not proceed further.

22.  In the meantime, on 28 February 2013 one 陳孝明 (“Chen”) applied for and obtained a temporary order from the court in Xuzhou City Yunlong  District (徐州市雲龍區人民法院) (“Yunlong Court”) in “(2013) 雲民訴保字第 0102號” to freeze the assets of徐州澳尼森國際貿易有限公司 (“Xuzhou Auson”) and of R1 up to RMB1,050,000 conditional upon Chen commencing his claim within 30 days thereof (“Freezing Order”).

23.  By an enforcement notice (協助執行通知書) dated 9 October 2013 issued by the Yunlong Court in “(2013) 雲民訴保字第 0142號” and addressed to Brother (“1^st Enforcement Notice”),  Brother was informed that R1’s right to receive RMB420,000 had been frozen for one year. 

24.  There was another enforcement notice dated 15 February 2015 issued by the Yunlong Court and addressed to Brother (“2^nd Enforcement Notice”) which stated that the RMB420,000 owed by Brother to R1 had been frozen and could not be paid without the agreement of the Yunlong Court.

25.  In March 2014, R1 caused the Company to commence proceedings against P at the Nanjing City Intermediate People’s Court in “(2014) 寧商外初字第22 號” (“Nanjing Proceedings”) to recover USD100,000 said to have been misappropriated by P from the Company. 

26.  After a full trial, on 22 September 2017, the Nanjing Court gave judgment in favour of the Company and ordered P to repay USD100,000 to the Company (“Nanjing Judgment”).  P’s appeal against the Nanjing Judgment was heard on 23 March 2018 and dismissed by the court. 

B.      DISCUSSION

B1.    Complaints in the Petition

27.  It is well established that the petitioner is confined to the heads of complaint set forth in the petition and cannot rely on any new head not fairly covered in the petition.  The principles have been stated in In re Fildes Bros Ltd[1970] 1 WLR 592 at 597G-598C in this way:-

“… the petitioner is confined to the heads of complaint set forth in his petition. His evidence may no doubt amplify and explain these complaints, but I do not think that he can rely upon any new head not fairly covered by his petition.

…

In In re Lundie Brothers Ltd [1965] 1 WLR 1051, 1058, Plowman J said:

‘It was suggested in the course of argument that it was really the evidence and not the allegations in the petition which was of importance in this matter. I entirely dissent from that proposition. It seems to me that it would be wrong for the court to travel outside the allegations in the petition, particularly in a case of this sort where the petition is based on the proposition that the respondents to it have been guilty of some oppression or some lack of probity.’

… In cases in which there are no normal pleadings, it seems to me important that those who oppose a winding up should know, in time to prepare their case, what are the allegations that they have to meet. If after a petition has been presented the petitioner wishes to broaden his attack, let him first amend his petition.” (underline added)

28.  The petition is a document which defines the issues and the scope of the proceedings just like a pleading.  As stated by Chu J (as she then was) in Re Tourmaline Ltd [2000] 4 HKC 348 at 354C-D:-

“Although a petition does not constitute a formal pleading, it serves to define the scope of the matters in issue and the disputes that the court has to resolve. Accordingly a petition must set out with precision and sufficient particulars the matters complained of or relied on by the petitioner in justifying a winding-up order on just and equitable ground, and the court will not travel beyond the allegations contained in the petition in adjudicating the matter: In re Fildes Bros Ltd [1970] 1 WLR 592 at 597G-598C. It follows that a sufficient case must be stated on the petition and defects or omissions in the petition cannot be cured by the supporting affidavit: see Derek French, Applications to Wind Up Companies, pp 86-88; Re Wear Engine Works Co. (1875) 10 Ch App 188 at 191.” (underline added)

29.  In the Petition, P makes the following complaints:

(1)  Prior to commencement of the Nanjing Proceedings, R1 did not inform P that the Company had not been deregistered and did not invite P to participate in any decision making process of the Company, contrary to the “common understanding” between R1 and P and the Shareholders Agreement (§25);

(2)  R1 failed to convene or hold any annual general meeting or any meeting.  As no valid general meeting or resolution could have been held or passed without P’s involvement, there was a breach of ss 111 and 122 of the former CO and ss 429 and 610 of the CO (§§26-28);

(3)  Since the commencement of the Nanjing Proceedings, the relationship between P and R1 has broken down.  As R1 had failed to deregister the Company pursuant to the Deregistration Agreement, acted in breach of statutory duties and excluded P from management of the Company, P has lost trust and confidence in R1 and cannot be expected to further participate in the management of the Company (§§29-30); and

(4)  As the parties have since the Deregistration Agreement agreed not to engage in the mining business, which was the purpose for which the Company was established, the Company is “no longer required” (§32). 

B2.    Evidence  

30.  The Company and R1 have all along been unrepresented.  On 17 June 2020, this Court allowed P’s application to give evidence through video conferencing facility (“VCF”) on the basis that he resided in the Mainland and could not travel to Hong Kong due to the travel restrictions in place.  R1 was informed about the direction. 

31.  The trial date was fixed on 4 September 2020, after having been adjourned twice on 6 July 2020 and 20 August 2020 to accommodate R1. However, no attempt has been made by R1 to participate in the trial through VCF.  Instead, by letter dated 3 March 2021 P’s solicitors informed this Court that R1 had again requested the Court to defer the trial on the ground that he was unable to travel to Hong Kong to attend the trial.  I refused to defer the trial as I took the view that no good reason had been shown to change the date of the trial. 

32.  At trial, neither the Company nor R1 appears. By letter dated 2 November 2018 to the Court, R1 purported to set out his grounds in opposition to the Petition.  The same contents were subsequently confirmed in an affirmation filed by R1 on 4 March 2019 (“R1’s Aff”). P filed his 5^th affirmation (“P’s 5^th”) in response to the grounds raised by R1. 

33.  As there is no order to exclude the affirmations filed by the parties if they fail to attend trial for the purpose of being cross-examined[9], R1’s Aff is admissible as evidence in these proceedings.  No submission has been made by Ms Priscilla Chow, counsel for P, in respect of R1’s Aff. 

34.  Nevertheless, I take into account the fact that R1 has not made himself available for cross-examination, such that the Court does not have the opportunity to test the credibility of his evidence. I will not give much weight to R1’s evidence unless his evidence is not disputed by P in P’s 5^th or that it is corroborated by documentary evidence. 

35.  P gives viva voce evidence through VCF. Except for the matters discussed in §§46 and 49(5) below, the evidence given by P including his answers to the questions posed by this Court are candid and I accept his evidence.    

B3.    Impermissible attempts to change P’s case

36.  In her written opening, Ms Chow submits that the Company is “a quasi-partnership”, being “an association formed on the basis of a personal relationship, involving mutual confidence” and the parties had “reached the common understanding that both shall be jointly responsible for the conduct of the business of mining development and trading and shall have equal say when it comes to decision making”.  This is despite the fact that none of the matters she points to have been pleaded in the Petition.  When this is put to Ms Chow, she maintains that the so-called “quasi-partnership” and “common understanding” have been pleaded in §§11-13 of the Petition. 

37.  I do not think it is open to P to expand or change his case through the various labels introduced by Ms Chow (for the first time) in her written opening for the following reasons:

(1)  It contravenes the principles discussed in §§27-28 above. 

(2)  Although the phrase “common understanding” was used in §§14 and 25 of the Petition, in neither paragraph was there any plea, let alone particulars of the alleged “common understanding” said to have been reached or accepted by both P and R1. 

(3)  Indeed, when asked by this Court as to whether the parties had reached any understanding or agreement before the Shareholders Agreement, P confirms that there was none. 

(4)  As regards the so-called “quasi-partnership”, it is clear from the Petition, R1’s Aff and P’s 1^st to 5^th that there was simply no personal relationship or dealings between P and R1 prior to their agreement to carry on the mining business through the Company; and their cooperation was nothing more than a commercial cooperation.  It is impossible to see on what basis Ms Chow can characterise the relationship between P and R1 as a “quasi-partnership” or one based on “personal relationship, involving mutual confidence”. 

(5)  In his oral evidence, P confirms that he only came to know R1 in July 2011, and had no prior relationship or cooperation with R1 before that.  P also confirms that he cooperated with R1 solely because he wanted to pursue the mining business.     

38.  In any event, even if (which is not established) there is any basis to suggest that there was the alleged “common understanding” or that the cooperation between P and R1 through the Company was a “quasi-partnership”, these matters per se are not sufficient grounds for the Court to grant any relief under ss 724-725 of the CO or s 177(1)(f) of CWUO. Properly understood, it is only where the basis upon which the shareholders cooperated in running the company was founded on their personal relationship, or the mutual trust and confidence reposed in each other or the manner in which they had cooperated in the past that it would be necessary for the Court to look behind the corporate structure and consider whether there was the common understanding, established practice or mutual trust and confidence between the shareholders as suggested by the petitioner which, although not enforceable as a matter of law, would create an equitable constraint over the exercise of legal rights by all the shareholders.  The principle is  best encapsulated in Re Saul D Harrison [1995] 1 BCLC 14, at 19a-20e, where Hoffmann LJ (as he then was) said this:

“Not only may conduct be technically unlawful without being unfair: it can also be unfair without being unlawful. In a commercial context, this may at first seem surprising. How can it be unfair to act in accordance with what the parties have agreed? As a general rule, it is not. But there are cases in which the letter of the articles do not fully reflect the understandings upon which the shareholders are associated. Lord Wilberforce drew attention to such cases in a celebrated passage of his judgment in Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492 at 500, [1973] AC 360, at 379. Which discusses what seems to me the identical concept of injustice or unfairness which can form the basis of a just and equitable winding up.

…

Thus the personal relationship between a shareholder and those who control the company may entitle him to say that it would in certain circumstances be unfair for them to exercise a power conferred by the articles upon the board or the company in general meeting. I have in the past ventured to borrow form public law the term ‘legitimate expectation’ to describe the correlative ‘right’ in the shareholder to which such a relationship may give rise. It often arises out of a fundamental understanding between the shareholders which formed the basis of their association but was not put into contractual form, such as an assumption that each of the parties who has ventured his capital will also participate in the management of the company and receive the return on his investment in the form of salary rather than dividend. These relationships need not always take the form of implied agreements with the shareholders concerned; they would enure for the benefit of a third party such as a joint venturer’s widow. But in Ebrahimi v Westbourne Galleries Ltd ([1972] 2 All ER 492 at 500) Lord Wilberforce went on to say:

‘It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that the company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of the association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more …’

Thus in the absence of ‘something more’, there is no basis for a legitimate expectation that the board and the company in general meeting will not exercise whatever powers they are given by the articles of association.” (underline added)

39.  Similarly, in Re Astec (BSR) plc [1998] 2 BCLC 556, Jonathan Parker J analysed the juridical basis for the Court to impose equitable constraint on the exercise of legal rights (at 586d-588d, applying Lord Wilberforce’s and Hoffmann LJ’s passages in Ebrahimi v Westbourne and Re Saul D Harrison respectively) and said (at 588d-f):-

“Thus, as I read these two authorities, in order to give rise to an equitable constraint based on ‘legitimate expectation’ what is required is a personal relationship or personal dealings of some kind between the party seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former. In my judgment, in the absence of a personal relationship or personal dealings of that kind a shareholder can reasonably and legitimately expect no more than that the board of the company will act in accordance with its fiduciary duties and that the affairs of the company will be conducted in accordance with its articles of association and with the Act. Such expectations merely affirm the existence of the shareholders’ legal rights. They do not constrain the exercise of those rights.” (underline added)

40.  The above passage was cited with approval in O’Neill v Philips [1999] 1 WLR 1092, at 1101, where Lord Hoffmann cautioned against extending the concept of “legitimate expectation” in circumstances to which the traditional equitable principles have no application (at 1102).

41.  In the present case, the matters complained of by P in the Petition concern either the alleged breach of Agreements (i.e. the Shareholders Agreement and the Deregistration Agreement) or breach of statutory duties.  It is not P’s case (as confirmed by him under cross-examination) that R1 acted in compliance with the Agreements (such that his conduct was lawful) but that his conduct was unfair or inequitable as it contravened the equitable constraints imposed on his legal rights.  The suggestion that there was the alleged “common understanding” or that the cooperation between P and R1 through the Company was a “quasi-partnership” is a red herring.    

42.  I turn to the complaints raised in the Petition.

B4.    Failure to deregister the Company

43.  The complaint has no merit.  As stated in §§14 - 16 above, under the Deregistration Agreement, P was under an obligation to pay RMB2,120,000 but he only paid RMB1,700,000 to R1, and the balance of RMB420,000 was never paid to R1. 

44.  In §17 of R1’s Aff, he said that after P had paid RMB1,700,000 to R1, Brother immediately told the former Mayor Miao (whose daughter was involved in setting up Auson HK with R1) to use his influence to freeze the RMB1 million deposited at bank.  Even after P had signed the Proof to confirm his agreement to pay the remaining balance of RMB420,000 to P by 26 February 2013, the amount was never paid.  P does not contradict this part of R1’s evidence in P’s 5^th. 

45.  It is difficult to see how P can complain about R1’s failure to complete the deregistration of the Company when the parties had agreed that the Company should only be deregistered after P paid the entire RMB2,120,000 to R1 by 26 February 2013, which P never did. 

46.  In trying to explain away his failure to pay RMB420,000 to R1, P relies on the Freezing Order, the 1^st Enforcement Notice and the 2^nd Enforcement Notice and asserts that he (and his Brother) had been prevented by the Yunlong Court from making the payment.  I do not accept P’s assertion:

(1)  The Freezing Order was only made on 28 February 2013, which was after the deadline (26 February 2013) for paying the remaining balance agreed under the Proof.  Moreover, the Freezing Order did not on its face bind any third party (such as P or Brother) and, therefore, would not have the alleged effect of preventing P from paying the remaining balance of RMB420,000 to R1.   

(2)  Similarly, the 1^st Enforcement Notice only came into existence on 9 October 2013, more than 8 months after the deadline for R1 to pay the remaining balance. 

(3)  The 2^nd Enforcement Notice was even more irrelevant as it was issued by the Yunlong Court more than 23 months after P had failed to pay the remaining balance by the agreed deadline.  

(4)  When asks about whether P (or his Brother) has ever paid the RMB420,000 to the Yunlong Court or the claimant (Chen), P says that he (or his Brother) has never been requested by the Court to make any payment as the proceedings are still pending in the Yunlong Court.  This is extremely odd as  proceedings in the Mainland courts are normally resolved within 3 years.  It casts doubt on P’s assertion that he had always wanted to pay the remaining balance of RMB420,000 to R1 in accordance with the Deregistration Agreement.

47.  As stated in Section B3 above, there was no “common understanding” between P and R1 and their cooperation through the Company was a purely commercial one.  R1 was entitled to act in accordance with the Deregistration Agreement and refused to take further step to deregister the Company after P had acted in breach of clause 2.2(1)-(3) of the same Agreement.  It is neither unfair nor inequitable for R1 to insist on his legal rights under the Deregistration Agreement. 

B5.   Failure to hold general meetings and breach of CO

48.  Before considering the complaint, it is necessary to consider whether the Company has carried on any business in its own right.  This is because if the Company has never carried on any business, it is difficult to see how the failure to hold general meetings or to lay audited financial statements at such meetings, albeit in contravention of the CO, can be said to be unfairly prejudicial to the interests of P or the Company or that it would be “just and equitable” for the Court to wind up the Company.

49.  The following facts and matters show that the Company has never carried on any business in its own right:

(1)  As stated in §§17-18 of the Petition, it is P’s case that both the investment in the Mines and the trading of nickel were carried on through the Nanjing Co.  They were not business or affairs of the Company. 

(2)  The terms of the Deregistration Agreement show that the business and dealings between P and R1 were either carried on through other companies (HK Auson, Indonesia Auson and Nanjing Co) or through P and R1 personally.  Consistent with this, after taking into account the amounts invested or paid by the parties, the net amount (RMB2,120,000) was payable by P to R1. 

(3)  In the IRD Request, it was stated that the Company had never carried on any business.  Although this document was only signed by R1, it was one of the documents sent by H&C to P, and P never took issue with the correctness of this statement. 

(4)  In the Form DR1 signed by both P and R1, it was stated that the Company had no outstanding liabilities and “either the company has never commenced business or operation or the company has ceased to carry on business or ceased operation for more than 3 months immediately before this application”. 

(5)  Under cross-examination, P claims that the Company carried on business in May 2012 which involved one shipment of nickel, such that the latter option in the Form DR1 (i.e. ceased to carry on business for more than 3 months) represents the true position.  I do not accept P’s evidence in this regard as it is contradicted by:

(a)  §18 of the Petition, which stated that the sale was made by the Nanjing Co;

(b)  §24 of P’s 1^st where P says that the sale was made by Nanjing Co and it suffered a loss of RMB8 million in that sale; and

(c)  the fact that no tax return has apparently been filed by the Company (which would have been necessary had the Company carried on that business in May 2012).  In this regard, I do not accept that P’s assertion that the filing of tax return was a matter for R1, given that he was the general manager and was responsible for dealing with financial matters of the Company.

50.  It is also clear from the evidence that after the parties had signed the Deregistration Agreement, P had lost interest in the Company and ceased to be concerned about its affairs:

(1)  On P’s own evidence, he has since February 2013 ceased to have any contact with R1 inasmuch that he has not asked any question about the Company or made any request concerning the Company.   

(2)  In §41 of P’s 1^st, he says that although H&C (on behalf of the Company) sent various emails to P’s email address informing him that the Company had not been deregistered, he was not aware of such emails as he did not check his email account during the entire period from March 2013 to early December 2017.  Given that, as P confirms in his oral evidence, the email account was created at the time of the incorporation of the Company and for its purpose, his act in not checking emails sent to his account shows that he was not concerned about the Company. 

(3)  Viewed against the above facts, P’s complaint about the failure of the Company to hold any general meetings or to present any financial statements at such meetings rings very hollow.   

51.  Having regard to the fact that the Company has never carried on any business in its own right and P has lost interest in the Company since February 2013, I do not think it is open to P to complain about the failure of the Company to hold any general meetings or to present any financial statements at such meetings.  At its highest, the breach is a technical one, and no unfairness or prejudice has been suffered by P as a result. 

B6.    Breakdown in relationship & exclusion from management

52.  In light of my holding that the cooperation between P and R1 was a purely commercial one, and did not involve any mutual trust and confidence, it is strictly speaking unnecessary to consider whether the breakdown in relationship or the loss of trust and confidence on the part of P in R1 can constitute a ground for the Court to grant any relief under ss 724-725 of the CO or s 177(1)(f) of the CWUO. 

53.  Nevertheless, since P has relied on the commencement of the Nanjing Proceedings as a ground leading to the breakdown in relationship with R1 at §29 of the Petition, where it is pleaded that “since the commencement of the [Nanjing Proceedings], the relationship between [R1] and [P] has broken down”, I will state my view on the issue. 

54.  In the Nanjing Judgment, which was delivered after a full trial at which P had advanced many grounds in opposition to the claim, the Court held that P had misappropriated USD100,000 from the Company and failed to account or return the same to the Company.  These findings confirm that it was P’s misconduct which led R1 causing the Company to commence the Nanjing Proceedings against P, and that such act of R1 was amply justified.

55.  As it is not in dispute that the commencement of the Nanjing Proceedings caused a breakdown in relationship between P and R1, were it were necessary to consider whether there had been a breakdown in relationship or mutual trust and confidence between the parties, I would have held that such breakdown was caused by the misconduct of P.  It is well established that where, as here, it was the misconduct of P which was causative of the breakdown in relationship, the Court would not grant any relief sought by the petitioner (Yeung Bun v Brio Technology International Ltd & ors [2000] 2 HKLRD 218, at 223F-225D).   

56.  For completeness, I would add that Ms Chow contends that the Court cannot take into account the Nanjing Judgment as the findings are opinions of the Nanjing Court and hence are not admissible as evidence (Chen Mei Lan v Registrar of Companies [2017] 1 HKLRD 924, §3).  The contention is misconceived.  In Chen Mei Lan, Queeny Au-Yeung J referred to the principle that a previous criminal conviction is inadmissible as evidence in subsequent civil proceedings.  The principle has no application here, given that the commencement of the Nanjing Proceedings is a matter relied on by P in the Petition, while the Nanjing Judgment is a document adduced by P in one of his affirmations filed in support of the Petition.  Having chosen to raise the issue and relied on the Nanjing Judgment as evidence in these proceedings, it is not open to P to contend that the contents of the Nanjing Judgment are inadmissible. 

57.  As stated in §50 above, since February 2013 P had lost interest in the Company and ceased to be concerned about its affairs. As soon as P knew that the Company had not been deregistered by March 2014 (as he accepts), it would be incumbent upon him to perform his role in accordance with the Shareholders Agreement or, at the very least, offered to assist R1 in performing such role.  P has done neither.  It lies ill in P’s mouth to complain that he has been excluded from management of the Company.

B7.    Company no longer required

58.  Ms Chow submits that a winding up order should be made “as there has been a failure of substratum of the Company” given that there has been “a final and conclusive abandonment of the business”, citing Re Media Vision Ltd [1993] 2 HKC 629, at 633C-F.  I do not think the case assists P.  In that case, the petitioner’s pleaded case was that “the company [had] not traded since in or about the third quarter of 1991, accordingly, the purposes for which the company was formed [had] now been concluded”.  Rogers J (as he then was) held that this part of the petition was demurrable as the assets of the company were still there and if the present management chose, the company could be run broadly as envisaged in the shareholders’ agreement (at 634A-F).  In other words, much depends on the fact of the case. 

59.  In the present case, by the time the Petition was presented, the Company still had ongoing affair, which was the claim against P for return of USD100,000.  There is no evidence that P has repaid the amount to the Company.  There is no factual basis for Ms Chow to suggest that there was “a final and conclusive abandonment of the business” of the Company.

B8.    No tangible interest and improper motive

60.  It is well established that a petitioner must show that he has a sufficient interest which to entitle him to ask for the winding up of the company.  This may be in the form of a surplus available for distribution to the shareholders or a “tangible interest” in the form of some advantage or avoid some disadvantage which would accrue to him by virtue of his membership of the company (Re Rica Gold Washing Co Ltd (1879) 11 Ch D 36, at 42-43, per Lord Jessel MR; Re Chesterfield Catering Co Ltd [1977] Ch 373, per Oliver J).    

61.  The Petition, to the extent that it seeks a winding up order against the Company, is demurrable as there is no plea that the Company is solvent or that there will be surplus available for distribution to the shareholders upon the winding up of the Company.  This is not surprising, as the evidence shows that the only asset of the Company was (and still is) the USD100,000 payable by P to the Company.  At the time the Petition was presented, P did not accept that he was liable to pay the USD100,000 to the Company.  There was therefore no basis for P to plead or assert that the Company was solvent or that there would be surplus available for distribution to the shareholders.

62.  When this point is raised with Ms Chow in opening, she asserts that P has subsequently come to an agreement to settle the Nanjiing Proceedings with the Company and P will make the payment in due course.  Ms Chow says that she intends to ask P to produce a settlement agreement said to have been made between P and the Company in 2019 during examination-in-chief.  I refuse to allow P to adduce the new document which had admittedly been available to P since 2019 but no attempt whatsoever has been made by P to disclose or adduce it as evidence in these proceedings. 

63.  In any event, even assuming P is going to pay the USD100,000 to the Company as Ms Chow suggests, it has not been demonstrated by P that if the Company is wound up by the Court, there will be any surplus available for distribution to the shareholders.  This again is not surprising given that the Company’s assets will have to be applied to pay liquidation expenses including remuneration and costs of the liquidators (which will be substantial) and other prescribed fees payable on the assets realised by the Company.    

64.  In her written closing, Ms Chow suggests, for the first time, that P does not have to show that he has sufficient interest in seeking a winding up order against the Company as the present case comes within the exception to the rule.  She suggests that “only very limited information in relation to the company is available to the petitioner and the affairs of the company requires independent process  of investigation upon winding-up”, such that P is unable to prove that he has a tangible interest in seeking a winding up order, citing Re China International Business Development (Hong Kong) Limited, CACV 94/2015, 18 November 2015, §§17-23).

65.  Neither matter relied on by Ms Chow has been pleaded in the Petition or established by evidence.  In any event, the so-called limited information in relation to the Company was the result of P’s own decision not to be concerned about the Company or to perform his role in accordance with the Shareholders Agreement.  It is also clear on the fact that there was nothing which require investigation.  Ms Chow says that the breach of the CO is a matter which requires investigation.  I disagree.  The breach has already been raised by P in these proceedings and determined by this Court.  No further investigation is required.